Two stories in today’s news provide court-side glimpses of two forms of market abuse that led us skipping down the garden path to the cratered economy. In this one from the Oregonian you can learn all about the alleged scams by various Oregon flimflam men who saw that the trough was unguarded. They apparently goosed up the value of properties, got inflated appraisals, and borrowed way out of proportion to the collateral, pocketing the overage.

They could act with impunity because the banks were turning their paper to Wall Street and didn’t have any reason to scrutinize loan applications.

And of course the liar loans promoted by banks were being bought by Bear Stearns. Here’s an update on criminal proceedings against former Bear Stearns managers facing indictments. Apparently, they knew that the loans they were buying were bunk.  Going to be fun to hear them explain why they kept hyping their hedge funds while secretly selling their own shares before it all crashed down.

All of this highlights the dark underbelly of deregulation.  Want a chuckle? Remember the movie, Wall Street? “Greed is good,” we were told by pop culture, by politicians and by professors.

So this is what they meant by “Good.”

David Sugerman

ps to regular readers-I’m out of here for a couple of weeks for vacation. While David Paul may pick up the slack, the blog may well go dark while I’m away. I’ll be back to it after the 4th of July weekend.

Interesting piece from the saints at New American Foundation’s Ed Watch blog on recent statements by Career Education Corp.’s CEO, Gary McCullough. Backstory: Mr. McCullough’s Career Education Corp (CEC) owns a number of for-profit trade schools, including Western Culinary Institute here in Portland. By way of full disclosure, I am one of the lawyers representing students pursuing a series of claims against Western Culinary and CEC over the school’s sales and enrollment practices.

Mr. McCullough provided insight into the company’s operations and financial statements in an investor briefing. It’s a let-a-smile-be-your-umbrella kind of thing. According to Mr. McCullough, CEC will emerge from its current problems in fine shape. Here’s the audio of the webcast with the CEO’s rosy predictions of better times ahead.

It gets interesting, as he explains that culinary school enrollments are down this year. But fear not: CEC is limiting admissions to “credit worthy” students, so things should turnaround.

“Credit worthy students” is a great turn of phrase. I guess what that means is that they are now agreeing that the high tuition costs of culinary schools like Western Culinary Institute are not a good lending risk. How could they be? Who would lend money–say $30,000–to students who will earn $10-12 per hour once they get out? What they fail to report is that they routinely sold students on their bright and lucrative futures, getting them to borrow tremendous sums for the “opportunity” to work in a kitchen for the kind of pay that can’t justify this level of debt.

All of this raises as many questions as it answers.  For example, I wonder how recently Mr. McCullough learned that there was a problem with credit worthiness? The smart folks at New America Foundation hypothesize that CEC has seen the light because it will now be supplying a chunk of the student loan cash to finance its students.

The other question is how a school like WCI can function in this environment. They charge eye-popping tuition that  does not provide significant net benefit to students.  How could there ever be a credit worthy student who will be upside down in the deal from the get-go?

Fun stuff, this.

David Sugerman

The story is coming out that Melvin Weiss, former class action securities lawyer, was sentenced to 30 months and fined $10 million under a plea deal with the U.S. Department of Justice. The Milberg Weiss law firm has been a national presence for years, handling some of the largest securities class actions in U.S. history.

I would be a hypocrite if I failed to write about this and say the obvious. As I’ve noted before, getting rid of the cheaters is critical to a healthy civil justice system. That’s true regardless of which side the cheater operates from. Melvin Weiss did a grave disservice to consumers and investors. I have my doubts that 30 months + $10 million is sufficient, if you think about the harm inflicted. Even so, it’s done.

I imagine that there will be quite the feeeding frenzy on the corruption at the Milberg Weiss firm in the blogosphere,  at the Chamber of Commerce, from the tort reform advocates, and over at FOX news. But let’s remember that the corruption that nurtured Milberg Weiss operated heavily on the investment firms, as well. If that’s not readily apparent, here’s a quick list for the consideration: Bear Stearns, mortgage lending, Enron.

All of that is beside the point. As one who handles class actions, I’m strongly in favor of getting rid of the corrupt. Good news in the end.

David Sugerman

Today’s Sunday Oregonian, addresses this complaint about misrepresentations regarding gas prices. The problem is the hidden credit card or ATM charge. What happens when a gas station posts its prices but fails to tell you–until after you make the purchase–that the price is higher if you pay with a credit card? Or when a gas station adds a courtesy charge or ATM charge without disclosing it at the pump?

Oregon’s Unlawful Trade Practices Act provides a means of addressing this death by a thousand paper cuts rip off. Individuals who succeed in proving an Unlawful Trade Practices Act claim can recover their or $200–whichever is higher–plus attorney fees.  There is even the possibility of seeking additional punitive damages if the practice is really bad. If the practice is wide-spread, consumers can actually pursue the matter as a class action to recover the monies illegally collected.

I’ve actually handled one of these cases before. It arose when Oregon ARCO stations charged an ATM fee. But they didn’t tell you until after you pumped the gas and then went inside to pay. The case, which was a class action, eventually settled.

They’re not big cases, but they’re important because they add up.  For consumers, gas price increases are a a huge economic issue. Another dollar or two as a surcharge is maybe only a little bit, or the equivalent of a paper cut. But consumers are being squeezed from all sides. That single little surcharge is just one more example of the fee-based ripoffs that make consumers poorer.  The charges add up in another way. When illegal charges are collected from many consumers, they add up as additional profits for the company that is violating the law. Not good.

Back to the article. It notes: “What’s unclear is whether gas stations are required to note on their marquee signs that there are two prices — one for cash, one for plastic. That once was a more common practice, but many gas station operators say they haven’t done so for years.”

I disagree. The Unlawful Trade Practices Act specifically prohibits misrepresentations about prices of goods. And a misrepresentation includes a failure to disclose information. So if a seller posts a gas price as $3.99 per gallon, and that price is a “cash only” price, it must say “cash only” or something like that, or it is risks violating the act.
David Sugerman

Double dose of irony in this report in today’s Oregonian. It seems that a lobbyist for the Oregon Coalition of Mortgage Originators, Shane Jackson, filed suit in Multnomah County Circuit Court to collect his unpaid fees of $20,000. According to the news report, he sued both the Oregon Coalition of Mortgage Originators and its president, William Ridge.

Back story: Jackson and the Oregon Coalition of Mortgage Originators worked to stop reforms aimed at tightening the rules on mortgage lending. Alert readers might immediately connect this effort to the whole lack of regulation that got us into the mortgage lending crisis.

More detail: The Oregon Coalition of Mortgage Originators took great glee in killing SB 965 in the 2007 session. The bill,  Senate Bill 965, would have required plain language disclosures and use of underwriting standards.  It would also have allowed consumers harmed by mortgage lenders misconduct to directly sue.

According to the news report, the real estate market downturn put Mr. Ridge in a position of being unable to meet the payments on his new South Waterfront Condo.  Ridge apparently defaulted. That’s apparently part of the reason why Mr. Jackson has not been paid.

So here’s the first level of irony. These cowboys were so busy protecting their “rights” (read: positions at the trough) that they wouldn’t acknowledge the obvious. Lack of regulation and market oversight caused the mortgage lending meltdown.  And that is the main culprit in the real estate slide that bit Mr. Ridge in the backside.  While no one knows whether prompt action would have boosted consumers’ confidence in the market, it’s easy to see how Mr. Ridge, the Oregon Coalition of Mortgage Originators, and their lobbyist have all gotten swept up by the under-regulated markets.

And as for the second level of irony, my vague recollection is that the Oregon Coalition of Mortgage Originators opposed reforms in part because they allowed consumers harmed by misconduct to…gasp…file a lawsuit if the lender’s misconduct injured the consumer.  I guess Mr. Jackson didn’t lose any sleep over filing a lawsuit when he got stiffed for his rightfully owed $20,000. Maybe he now has a different take on the need to be able to pursue claims in court?

The whole thing would be little more than a belly laugh if so many others weren’t otherwise harmed by the collapse.  Can’t help but wonder what my friends at Our Oregon think of all this. They fought valiantly for consumers on SB 965. Angela Martin from Our Oregon was demonized for taking the lead. A number of good people–my friend Phil Goldsmith, for example–spent countless hours working on behalf of consumers on these issues.

I wonder now if Mr. Ridge and Mr. Jackson have had second thoughts about their work opposing lending  reform or about Our Oregon’s work on SB 965?

David Sugerman

NPR’s story and interview of a insider from the mortgage lending world provides a chilling glimpse into how we got here. Tracy Warren worked as a loan auditor reviewing mortgage loans that were being sold to Wall Street investment banks, like Bear Stearns.

The radio story makes for a great listen, as Ms. Warren comes across as straightforward and direct. She explains how she routinely saw loans for $500,000 homes in California. The borrowers were hotel workers who claimed to be making $15,000 a month.  Ms. Warren provides a compelling account of how her supervisors routinely overrode her reviews that sought to cull out bad loans before selling them on to Wall Street investment firms.

Sounds like the auditing firm that she worked for, Watterson-Prime, may have been eating at the trough. It would be interesting to see whether her supervisors were paid based on the numbers of loans approved or whether Watterson-Prime had a piece of the action of loans that moved on to Wall Street.

I can’t wait to hear Wall Street banks like Bear Stearns point the finger back at the auditors.  You know we’re in trouble when the smartest guys and gals in our financial system claim that they were duped. And of course, no one has the will to stand up and talk about the naked emperor here. When you insist on deregulating financial markets and transactions, greed will out. And no, unchecked greed is not a good thing.

The other thing is that I imagine we’ll hear similar stories coming out of what appears to be an impending  student loan system collapse.  But of course, it’s early yet.

David Sugerman

It sounds like a set up in search of a punch line: What’s the difference between an Oregon lawyer and a Texas lawyer? If you’re an Oregon consumer, you can have a laugh, and if you live in Texas, well, shed another tear.

Oregon requires that each Oregon lawyer carry liability insurance, as a way to protect consumers in case the Oregon lawyer mishandles the client’s matter.  The Professional Liability Fund provides the first level of insurance to all Oregon lawyers. And that’s part of the secret to its success. There’s a lot of purchasing power when you have a large group buying insurance. As a result, the annual premiums are affordable.

Texas takes a different approach. A commission set up by the Texas Supreme Court recently rejected a rule that would require all Texas lawyers to inform clients about whether they have liability insurance.  The proposed rule was fairly straightforward. It simply required all Texas lawyers to disclose whether they had malpractice insurance. The commission rejected the rule. I guess it’s there own special version of, “Don’t ask; don’t tell.”

According to the news report, the commission rejected the rule because…gasp!…it could lead to mandatory insurance.  Oregon lawyers and consumers have got to be ridiculing Texas over this one. Lord knows that mandatory liability insurance could lead to actual protection of the public interest.

This one is a no brainer.  As an ex-Texan, I can say with the certainty of one who was born and raised there, no one ever accused the mighty Lonestar State of being long on brains. (And of course, I feel compelled to explain that it was a long time ago, I had no say in the matter, and…and…and….)

Having insurance is actually one of those comforts for both me and my clients. I’ve handled multiple lawyer malpractice cases over the years, and I’ve learned that lawyers sometimes make mistakes that can do great damage to our clients.

So why would anyone go without?  The Texas commission really missed the boat on this one.  Mandatory insurance has protects the public in Oregon.  And even if Texas won’t insist on insurance, the Texas commission chose to sow more seeds of distrust by blowing past the chance to provide Texas consumers with a small bit of protection. Bad call.

David Sugerman

Probably just coincidence, but it caused me to snicker.

Last night I was channel surfing in a vain attempt to find Oregon primary election results.  I happened upon an earnest woman who confided in me and all my fellow viewers that we really need to be concerned about global warming and foreign oil. With a knowing but concerned smile–and with chirping birds in the background–she faced the camera and explained that we need nuclear power now more than ever.

Like I say, it’s probably just coincidence. Today’s news reveals that a federal judge court upheld a $350 million dollar verdict in a class action brought on behalf of some 15,000 landowners against the nuclear industry.  They claimed that their lands were contaminated from the operations of the Rocky Flats nuclear weapons plant.  The jury agreed, awarding the aforementioned damages. The judge also added interest, increasing the $350 million verdict to about $900 million. Guess we’re going to see an appeal….

This is one of those staggering cases, in terms of size and duration. I don’t know anything about it other than what I read in the paper.

Even so, it’s easy to fill in the blanks. A nuclear waste contamination case would be profoundly expensive to pursue because of legal fees and the costs of experts. The nuclear industry would surely defend such a claim in a tough and hard-nosed fashion. For those reasons, a case like this probably could not go forward without the class action device.

I’m sure that the team representing the landowners has done an unimaginable amount of work to get to this point.  It takes an amazing level of commitment to take on a case like this and to see it through to the end. Let’s hope that the landowners see justice soon, and the legal team representing them is properly rewarded for taking on a very tough case.

And as for the brightly lit woman and her soothing dulcet tones who talks so earnestly about our nuclear power needs….Can’t help but wonder what the Rocky Flats people would say about that.

David Sugerman

Just announced today: The Oregon Attorney General’s office led the way in a multi-state settlement with Merk over its marketing of Vioxx.  The settlement includes a payment of $58 million to the participating states. As well, the settlement requires Merk to get pre-approval of its advertising from the FDA.

Merck aggressively promoted Vioxx in direct consumer ads. Based on the Oregon press release, it looks like Merck’s marketeers may have been a tad…uh…aggressive.

No word on how the money from the settlement will be distributed.

Kudos to the folks in the Department of Justice consumer section for pushing.  Proper enforcement of consumer laws is especially important when a drug that can cause serious injury is oversold by a drug company.

David Sugerman

Those of us who handle wage and hour cases learned yesterday that the Oregon Supreme Court issued a major decision denying employees the right to collect wages. In the case, Gafur v. Legacy Good Sam Hospital, workers who did not get mandatory rest breaks sued to collect unpaid wages.

Oregon law provides that employees get 10 minutes of rest for every four hours worked, and no pay may be deducted for the rest break. The employees argued that Oregon’s rest break rules means that they should have been paid 10 minutes’ wages when they were denied rest breaks. The logic to the argument is sound, in that for employees time is money. So if you’re not allowed to take the time provided to you, you should at least get the money.

But logic and law don’t always mesh. The Court got there by finding that the regulations are for health and safety and don’t create an entitlement to pay.

The other interesting thing is that the State Bureau of Labor and Industries–”BOLI”–filed an amicus, or friend of the court, brief that supported the employees. So the employees had both logic and BOLI on their side. Neither swung it with the Court.

The last interesting point is that the Court–as is common–was unanimous in its decision. At least two of the Oregon Supreme Court justices had significant background representing employees before they became judges. And most of the rest of the court had substantial experience representing the State–here BOLI. But as is common with our court, the judges’ pre-appointment backgrounds proved to be poor predictors of the outcome. This is one of those other measures of judicial integrity and judicial independence–two critically important features of our courts.

I can say as much, even though I believe the Court got it wrong. No doubt this is because I represent employees in wage claims and see these issues through a partisan filter.

David Sugerman